Protective Measures

Effective Fraud Detection Measures Used by Filers

Filers reported various measures for detecting potential mortgage loan fraud involving particular examination procedures and red flag indicators. There are a variety of legitimate transactions that can raise a red flag, and the mere presence of a red flag does not automatically indicate suspicious or illicit activity. The following red flags and detection measures were derived from a review of SAR narratives describing mortgage loan fraud detection measures.

Some lending institutions rely heavily, though not exclusively, on submitting brokers to perform proper due diligence checks on the loan applicant. Sampled SAR narratives suggest that lending institutions performing independent due diligence on the borrower and conducting re-verification of documents increase their ability to detect fraud. In many cases, these checks can quickly identify document fraud. Additionally, by tracking failure rates of loans associated with particular brokers, lenders are detecting systematic abuses.

In many cases, applying simple reasonability tests are sufficient to detect fraudulent documents. For instance, a much greater than normal increase in year-to-year income or an occupational income far higher than those of others in the same line of work can present a red flag. An effective measure to detect fraudulent documents includes performing routine tests to ensure the applicant?s reported Social Security and Medicare withholdings do not exceed the limits established by law.

Borrowers purchasing property described as a primary residence, but outside of their home states, or located an unreasonable commuting distance from their stated employer, could be an indication that the borrowers do not truly intend for the property to be their principal residence. This could be an indication of straw buyer involvement or that the property is intended as an investment rather than a principal residence.

Mortgage brokers or borrowers that always use the same appraiser can be a red flag for appraisal fraud in some instances.

In some cases, identity theft can be detected and prevented by ensuring that the borrower?s signature matches on all documents. Sampled SAR narratives show multiple instances of alert reviewers detecting fraudulent applications by comparing document signatures and finding discrepancies. Alert loan settlement providers can also prevent ID theft by ensuring that all parties present acceptable photo identification and ensuring that all documents are signed in front of a licensed notary public.

Multiple problematic loan applications containing the same parties working in conjunction with one another may also be a red flag for organized fraud. For example, numerous transactions involving the same mortgage broker, seller, appraiser, and settlement agency may be a red flag for a fraudulent arrangement.

Other Protective Measures

As noted below in the section on ?Findings Observed from Sampled Narratives,? financial institutions are increasingly detecting fraud prior to loan funding.17 The most effective financial institutions observed in the sample achieved this during the underwriting process by re-verifying the information provided in the loan application. Various federal regulatory agencies have issued guidance in response to consumer protection concerns and for reasons of safety and soundness. This guidance may provide further insight on fraud detection. Some of these documents include guidance on issuing subprime loans,18 and best foreclosure prevention practices.19 In addition, various state agencies have offered guidance to banks on mortgage lending practices as well.20

Lenders are encouraged to use the loan settlement statement (frequently the Form HUD-1) to identify clues about possible loan fraud prior to loan disbursal. Close scrutiny of where the loan funds are going could identify potential fraud prior to loan disbursement. Anecdotal reporting by law enforcement suggests that an atypically large disbursement or more of the funds to an entity or individual whose role in the transaction is not readily apparent could be an indication of fraud.

17 See subsection Fraud Detection.

18 For an example of this, see Statement on Subprime Mortgage Lending, issued jointly by the Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision, and National Credit Union Administration. The full document can be found at: http://www.occ.treas.gov/ftp/release/2007-64a.pdf.

19 For example, see Foreclosure Prevention: Improving Contact with Borrowers, Office of the Comptroller of the Currency, http://www.occ.treas.gov/cdd/Foreclosure_Prevention_Insights.pdf.

20 For instance, various guidelines can be found on the Conference of State Bank Supervisors website; see http://www.csbs.org.

Excerpted from Mortgage Loan Fraud: An Industry Assessment based upon Suspicious Activity Report Analysis -April 2008, page 20